The value of political connections in the post-transition period: evidence from Czechia

Abstract

This paper studies the relationship between political connections and reported profits using a newly compiled dataset on all corporate donations to political parties in Czechia during its post-transition period (between 1995 and 2014). I develop a dynamic matching approach to identify non-connected firms that are similar to their connected peers on a range of observable characteristics, including profitability prior to becoming connected. I find that being politically connected is associated with superior reported profits: I estimate conservatively that the connected firms outperform their non-connected but otherwise similar competitors by 8–12% following the establishment of the connection, which is a larger effect than found previously for more developed economies. What is more important, however, I find that the effect virtually vanishes for non-connected firms aligned closely with the public sector. That evidence suggests that other forms of connections, such as personal ties and those established at subnational levels of government, such as regional and municipal governance tiers, are likely to have played a significant role in Czechia during its post-transition period.